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NAIROBI, KENYA: A sting operation conducted at Mumias Sugar Company premises has uncovered an elaborate network through which some of the firm’s employees have been colluding with rogue Kenya Revenue Authority (KRA) officials to defraud the company by under-declaring the quantities of ethanol for export and issuance of falsified allocation letters.

The scam has created a big hole in the sugar miller’s only viable business line, leading to questions about whether the company’s already ‘sinking’ ship will be strong enough to withstand the latest scandal, estimated to have cost it hundreds of millions in lost revenues, making revival an uphill task.

Mumias has a distillery with capacity to produce 22 million litres of ethanol annually and was one of the first millers in the country to venture into ethanol production as part of a diversification plan meant to secure its future, as Kenya prepared to open its sugar market to external competition.

A litre of ethanol meant for export is currently priced at Sh93. Kenya charges an additional Sh220 per litre in duty if the product is for the domestic market. However, for export, the Government charges no taxes.

Some of the suspected employees colluded with KRA officials to divert ethanol meant for export into the local market in the process denying the KRA massive tax revenues.

The miller sent six managers packing after the scandal erupted two months ago, joining over 52 staff members who have either been sacked or suspended following a series of scandals at Mumias Sugar.

The managers were accused of colluding with local buyers and a KRA customs officer to fake documents and divert ethanol destined for Uganda and Tanzania into the domestic market.

Mumias Sugar Company Managing Director Coutts Otolo told Business Beat that investigations were indeed ongoing and had reached a critical stage.

“Investigations are still ongoing. The CID have now picked up the investigations,” said Otolo.

Business Beat has seen video recordings of the sting operation, being compiled as evidence against three senior executives at the firm.

Our team also watched videos and listened to telephone conversations captured as part of the evidence-gathering process to nab the cartel, in which some officials are heard plotting how to squeeze bribes from a Ugandan businessman who was in the country to buy ethanol. The plot was to get the bribe in exchange for an allocation letter from the KRA, without which one cannot buy ethanol from Mumias Sugar.

On one of the audio recordings, a man identified as a senior clerk who is among the suspended officials, is heard advising the Ugandan businessman on how to deliver the bribe money to feed the cartel.

 Negotiating bribe

The suspended officer is heard negotiating the bribe with the businessman. The loot, put at between Sh500,000 and Sh1 million, is meant to secure the release of an allocation letter for the transaction.

Generally, insiders collude with KRA officials to ensure everyone who buys ethanol from Mumias pays a five-shillings kickback fee per litre of ethanol purchased to get an allocation letter from Times Towers.

This means that for a customer who orders two million litres, the cartel pockets Sh10 million without breaking a sweat to "facilitate release of the allocation letter".

In the sting operation, the customer in question wanted to buy 200,000 litres of ethanol. At this volume, he was asked to part with Sh1 million in ‘facilitation fees’.

One officer who was caught on camera, a Mr Evance Ochieng, reportedly owns a fleet of public service vehicles plying the Kisumu-Oyugis route. Before his suspension, he was in charge of loading cargo on trucks. In the recordings, he is heard warning that unless he gets the green-light from other members of the cartel, there would be no cargo leaving.

He discloses on camera that he had spoken to the KRA official, who was expected to direct the client where to drop off the bribe.

“You know the KRA man is the boss. This is a secret between you and him. He will send one of his boys to pick the money from you,” Mr Ochieng is heard saying. Ochieng reveals in one the recordings, which is in our possession, that the KRA official has “people whom he works with.”

Contacted for comment, Ochieng admitted having been suspended but denied owning any of the properties he has been associated with.

“I was suspended and given three reasons among them mismanagement and collusion but I am innocent in all these things. My wife is the manager of the Destination matatus but I do not own them. They are owned by a close friend,” he said. But he declined to name the owner of the said fleet of public service vehicles.

KRA resident officer at Mumias, Samuel Kihara, refused to comment on the allegations when contacted.

“I am not ready to talk and it is my constitutional right not to talk to you,” Kihara charged.

Investigations reveal that drivers, security guards and a clearing agent are also part of the wayward schemes.

Some of the officers who have been suspended from the company for various reasons in the past few months include a director, an export co-ordinator and the area trade development manager. Also suspended are national sales manager and the production manager. But only three have been directly linked to the scam.

 Last lifeline

“We have solid evidence against three of those suspended but investigations are yet to be fully concluded to clear the remaining  three executives,” a source privy to the investigations said.

Top management has for weeks been grappling with how to deal with this latest scam at a time when the company has turned on the Government with a begging bowl to bail it out.

Ethanol was being propped up as the last lifeline for Kenya’s biggest sugar company after its sugar business was rocked by an importation scandal and shrinking sugarcane supply.

It is estimated that the company has been losing at least 300,000 litres of ethanol every year to the scam. Last year, about 600,000 litres of ethanol were siphoned from the miller between November and December.

For months, the company had trouble knowing how much ethanol it actually had in its storage tanks due to faulty measurement gadgets that made it impossible to accurately tell the actual volumes.

There has been incessant conflict between the warehouse department and production departments that frequently present questionable reports on what was produced and what is in the storage tanks.

The anomaly has opened up an avenue for massive diversion of cargo meant for the international market and its dumping into the local market.

This means that export cargo diverted into the domestic market, one can make an additional Sh220 for every litre if sold at market rates. They would also have headroom to undercut other suppliers in the market by a similar margin.

This makes it attractive for unscrupulous businessmen to fake export certificates and mint millions in the ethanol diversion scam.

A company headquartered in Tanzania, which cannot be named because it hadn’t responded to our enquiries by the time we went to press, would purchase ethanol as an export product headed for Tanzania but then end up dumping the product in the Kenyan market.

The executives would then fake export certificates and deny the taxman its dues. Evidence gathered so far also show instances where a company would be given more products than it had paid for.

“Ethanol is not weighed for a number of reasons, one being that its weight depends on temperatures. There are many instances where we have found a truck loaded with more quantities of the product than what has been paid for,” a highly placed source at Mumias Sugar who requested not to be named told Business Beat. The source requested anonymity to protect his job.

Since Ethanol is a bonded product, no one would be allowed to buy the commodity from Mumias without an allocation letter. Buyers who refuse to play the game as demanded by the cartel are usually frustrated until they comply.

“An exit note is supposed to be written before the cargo leaves. But there are instances when this has been done at the border. By doing this, it is difficult to have the ethanol tracked,” the source said.

 Escorting ethanol

Initially, KRA used to escort every ethanol shipment destined for export until the exit point. But it later handed over this role to Mumias Sugar, arguing that ethanol remained the company’s product until it left the border.

Investigations have however shown that Mumias employees hardly accompany the product.

They only link up with the transport trucks at the border. This allows all sort of dealings, among them dumping of the products into the domestic market.

“The truth is we have not been accompanying the product. At times, you are called and booked into a nice hotel and asked not to worry about the commodity,” the source said.

In October last year, the miller lost Sh18 million on cargo originally destined for Uganda.

Ethanol in a tanker that was part of a beer company’s consignment was declared of poor quality and therefore not paid for despite records showing the opposite.

Despite being paid for in Uganda, the money was never remitted to the miller. Instead, the consignment was recorded as having been shipped back into the country for refinement. Days later, another consignment of 4000 litres left the company purportedly as a replacement.

Revelations on the ethanol scam come at a time the miller is struggling to recruit new customers. Already, it has lost more than twenty clients in the span of one year. The number has dropped from about 30 ethanol buyers one year ago, to less than six at the moment.

Another video clip captures a conversation between Ochieng and a Ugandan businessman who is trying to pay a bribe to get his cargo cleared.

Ochieng played along but later changed his mind and said he was only acting like that under the influence of alcohol.

“It is true I was set up to take a bribe. But I refused it the following morning when I realised what was going on. I told them to forget what I had said the previous night because I was acting under the influence of alcohol,” Ochieng said, corroborating part of the clip.

In the clip recorded the following morning, the officer is heard changing tack, and even asks the businessmen not to deal with him again because he does not work for KRA.

“I was drunk and I have forgotten what I said,” he says.

When The Beat put him to task about the recording, he said the clip was not complete and added that if the whole of it was played, his innocence would be proved.

Ochieng joined the miller in 2012. In the three-year period, he is said to have accumulated significant wealth that peers in his job group only dream off.

He however, insisted that he has so far been put through two different forensic audits, during which he declared his innocence. He was never revealed the outcome of the audits.

Suspended managers

Some of the managers who have been suspended by Mumias are accused of colluding with local buyers and some KRA customs officers to fake documents and divert ethanol destined for Uganda and Tanzania into the domestic market.

Mumias has a distillery with the capacity of producing 22 million litres of ethanol annually and was one of the first millers to venture into ethanol production as part of a diversification plan meant to secure its future as Kenya prepared to open its sugar market to external competition.

Half of the ethanol that Mumias produces is sold locally while the remaining half is exported, mainly to East African market.

Mumias earned Sh1.03 billion from the ethanol business in the year to June 30, 2014. Its biggest customers are East African Breweries Limited and Keroche Breweries in Kenya and other brewers in the region.

The scam comes at a time when the miller’s ability to produce ethanol has declined due to shortage of sugarcane, its raw material.

The theft will further bleed the miller whose losses widened in the first half of the year.

The cash-strapped miller’s losses hit the Sh2.08 billion mark in the first six months of the year, from a restated loss of Sh407.4 million a year earlier.

KPMG in its explosive forensic audit unearthed massive misuse of funds, pilferage and tender manipulation that cost the company Sh1.1 billion in illegal sugar exports.

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Mumias Sugar Company Kenya Revenue Authority (KRA) Coutts Otolo
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